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Closed-End Formula for options linked to Target Volatility Strategies

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  • Luca Di Persio
  • Luca Prezioso
  • Kai Wallbaum

Abstract

Recent years have seen an emerging class of structured financial products based on options linked to dynamic asset allocation strategies. One of the most chosen approach is the so-called target volatility mechanism. It shifts between risky and riskless assets to control the volatility of the overall portfolio. Even if a series of articles have been already devoted to the analysis of options linked to the target volatility mechanism, this paper is the first, to the best of our knowledge, that tries to develop closed-end formulas for VolTarget options. In particular, we develop closed-end formulas for option prices and some key hedging parameters within a Black and Scholes setting, assuming the underlying follows a target volatility mechanism.

Suggested Citation

  • Luca Di Persio & Luca Prezioso & Kai Wallbaum, 2019. "Closed-End Formula for options linked to Target Volatility Strategies," Papers 1902.08821, arXiv.org.
    • Handle: RePEc:arx:papers:1902.08821
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    File URL: http://arxiv.org/pdf/1902.08821
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    References listed on IDEAS

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    1. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
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    5. Gilster, John E., 1990. "The Systematic Risk of Discretely Rebalanced Option Hedges," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(4), pages 507-516, December.
    6. Antonio S. Mello & Henrik J. Neuhaus, 1998. "A Portfolio Approach to Risk Reduction in Discretely Rebalanced Option Hedges," Management Science, INFORMS, vol. 44(7), pages 921-934, July.
    7. S. Albeverio & V. Steblovskaya & K. Wallbaum, 2013. "Investment instruments with volatility target mechanism," Quantitative Finance, Taylor & Francis Journals, vol. 13(10), pages 1519-1528, October.
    8. Boyle, Phelim P & Vorst, Ton, 1992. "Option Replication in Discrete Time with Transaction Costs," Journal of Finance, American Finance Association, vol. 47(1), pages 271-293, March.
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    Cited by:

    1. Luca Di Persio & Matteo Garbelli & Kai Wallbaum, 2021. "Forward-Looking Volatility Estimation for Risk-Managed Investment Strategies during the COVID-19 Crisis," Risks, MDPI, vol. 9(2), pages 1-16, February.

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